The major US equity indices snapped back higher to close at fresh records, with the broader market also participating as small caps stocks erased the weak session from Monday. European equities closed mostly unchanged yesterday after a choppy session but may take heart this morning from the euro backing well off new highs yesterday against the US dollar.
What is our trading focus?
- S&P 500 Index (US500.I) and NASDAQ 100 Index (USNAS100.I) – US equities closed at new record highs and the day’s session was not marred by the divergence so much in evidence in recent days, as stocks rallied nearly across the board, including a full comeback from Monday’s session for small caps yesterday. While the good cheer continues, we have argued that the price action has steepened to a degree that is difficult to maintain and we are charging toward a very significant event risk in two months – the US election, with very different outcomes. More to follow on that.
- STOXX 50 Index (EU50.I) – European equities managed to pick themselves up from new local lows and close approximately unchanged. The failure of EURUSD to maintain its break to new two-year highs and above 1.2000 could contribute to a brighter outlook for Europe today if the euro continues lower again. As well, the August CPI reading was the weakest year-on-year reading ever and is prompting hopes for forceful signaling from the ECB at its meeting next week.
- EURUSD – EURUSD poked to new highs for the cycle yesterday, just managing to breach 1.2000 before falling sharply and trading this morning closer to 1.1900. The weakest ever core CPI reading yesterday for August raises the likelihood that the ECB will pull out all of the stops with new measures aimed at defeating deflation risks at its meeting next Thursday. The 1.1900 level has been pivotal and a close significantly below could raise the risk of a move back toward 1.1700, especially as speculative long positioning is at a historic extreme in the US currency futures market.
- Spot Gold (XAUUSD) & Spot Silver (XAGUSD) – Yesterday’s price action was somewhat discouraging. This after gold failed to challenge $2000/oz despite support from a weaker dollar, record low US real yields and supportive comments from US Fed members. Silver meanwhile failed to attract additional buying despite reaching its strongest level against gold since April 2017. It may signal markets that need a longer period of consolidation and that they – at least in the short-term – may struggle to break higher without support from a weaker and already oversold dollar and a further decline in yields. The euro reverting back below €1.19 also raising some nervous eyebrows. This after ECB member Philip Lane said “the euro-dollar rate does matter.” The area of resistance remains between $2000 and $2015/oz with trendline support from the June low at $1924/oz.
- WTI Crude Oil (OILUSOCT20) & Brent Crude Oil (OILUKNOV20) – both remain rangebound with WTI being anchored around $43/b and Brent around $45.5/b. This despite a generally price friendly news flows this Wednesday. US crude stocks are expected to show a sixth weekly decline when the EIA reports at 14:30 GMT today. This after the American Petroleum Institute reported a 6.4 million barrels drop last week. US ISM date beat estimates while OPEC only increased production by half of what was agreed for August according to a Bloomberg survey. WTI and Brent both trade above their 200-day moving averages but continued coronavirus concerns and slowing demand into the autumn/winter months have so far helped capped the upside.
- AUDUSD – the AUDUSD suffered a setback overnight, in part as the US dollar staged a minor comeback yesterday, but also as Australia posted a weaker than expected Q2 GDP number (more on that below). The move has not yet done any technical damage to the rally in AUDUSD, which would require that the price action slips back below 0.7250-25, so trend followers would look to add to longs well ahead of those levels.
- AUDNZD – the AUDNZD was in for an ugly drop yesterday as the RBNZ Governor Orr, widely considered one of the most dovish central bank heads, said that he isn’t concerned about the kiwi (NZD) exchange rate, which promptly spiked higher, particularly against a struggling AUD on the latter’s weak GDP report. This has taken AUDNZD down to a critical 1.0800-50 pivot zone that needs to survive if the rally from just below 1.0600 is to survive.
- Tesla (TSLA:xnas) – Tesla closed over 4% lower yesterday after announcing that “from time to time” it will sell as much as $5 billion in new shares, according to an 8k regulatory filing. It will purportedly use the sale proceeds to bolster its balance sheet and for other purposes. It would be the largest of such secondary offerings in the company’s history if it even reaches half of that total. Note that Tesla’s common stock count grew by 20 million shares in Q1 and another 5 million in Q2. That more than 3% growth in shares outstanding contrasts with Apple reducing its share count by 2.3% via buybacks over the same two quarters.
- Walmart (WMT:xnys) and Amazon (AMZN:xnas) – Walmart announced yesterday its new Walmart+ service in the US that will compete with Amazon Prime as a subscription-based model that will allow subscribers free shipping for orders over $35 dollars and fuel discounts at Walmart’s fuel stations. The pricing compares favourably with Amazon’s. While Amazon has significant other business units – especially its Amazon Web Services – it will be interesting whether the market begins to treat Walmart valuation differently based on its significant move into e-commerce, something it showed signs of doing late last week with the announcement of Walmart’s interest in joining Microsoft in its bid for TikTok operations – with that effort currently in confusion over new Chinese official involvement in the sale.
- Crowdstrike (CRWD:xnas), Copart (CPRT:xnas), MongoDB (MDB:xnas), Guidewire Software (GWRE:xnys), Smartsheet (SMAR:xnys) – US earnings releases all reporting after the close. Given the positive momentum into earnings we have observed across many recent earnings releases such as Zoom and Salesforce our view is that many of these names could see price action ahead of earnings release.
What is going on?
- Australian recession is confirmed – first in 28 years – the Australia Q2 GDP estimate of –7.0% QoQ (worse than the I-6.0% expected), thus confirming two consecutive negative growth quarters and ending Australia’s near three-decade positive GDP run. The news was inevitable, given the Q2 lockdowns, and now the outlook is key, as the government and central bank are faced with a two-speed recovery, with the mining industry booming on commodities demand from China while the services sector is still in the throe of dealing with the virus aftermath.
- Axios reports on risk of a “Red Mirage” on US Election Night this November 3rd – according to the story, it is quite possible, if not likely, according to a Michael Bloomberg-funded intelligence group called Hawkfish that Republicans will have voted in far greater numbers in person than Democrats and could appear to have a strong lead on election night as votes are tallied, as the many mail-in ballots will take days and weeks to count, enhancing the risk that US President Trump could declare victory before results are fully tallied or bring new accusations of voting fraud. As well, mail-in ballots are rejected at a higher rate than in-person ballots.
- US long treasuries rally further – risk appetite as strong yesterday, but that didn’t prevent long treasuries from putting in a strong session yesterday and more or less completing a reversal of the recent sell-off wave that took the 10-year benchmark yield close to the interesting 0.75%. With this rally, treasuries revert to becoming uninteresting again, unless a new sharp sell-off materializes or if this rally extends aggressively and flattens the curve further, which would suggest that the market’s growth and inflation outlook are waning.
What we are watching next?
- US August ADP Private Payrolls change up today – this data series missed badly in July, only posting a rise of +167k jobs, when millions across the US are unemployed. Recent weak confidence numbers in the US suggest that the labour market remains weak, and support in the form of benefits was curtailed at the beginning of August, so for the bottom half or more in the K-shaped recovery, the outlook could be worsening without a stronger bounce-back in sentiment and hiring.
- US election risks – as an indication of how seriously this market is treating the risks around the US election due to the very different implications for policy, Bloomberg ran an article claiming that this is the “worst event risk in VIX futures history” as evidenced by the spike in prices for the October VIX futures relative to prices for September and November futures.
Economic Calendar Highlights for today (times GMT)
- 1215 – US Aug. ADP Employment Change – expected at +1M vs. +167k in Jul.
- 1300 – UK BoE Speakers Governor Bailey and others
- 1400 – US Fed’s Williams (Voter) to Speak
- 1400 – US Jul. Factory Orders
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 1600 – US Fed’s Mester (Voter) to Speak
- 1600 – US Fed Beige Book
- 0145 – China Aug. Caixin Services PMI
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